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Sunday, June 27, 2010

Luck Is The Key To Success For Most Top Mutual Funds

IN THE NEWS from Forbes.com


A new study by Eugene Fama and Kenneth French shows that actively managed funds are not able to consistently outperform passive market indices, and that these actively managed funds consistently result inferior returns for investors because of their high fees.

The study shows that the reason why some funds outperform benchmarks sometimes is not because fund managers are highly skilled, but because of luck. The article further points out that since there are thousands of actively managed equity funds, even if all fund managers were randomly picking their portfolios by throwing darts at a stock page, a large number of funds would still soundly beat market averages.

The main point of the article is that it does not make sense to pay professional fund managers to construct a portfolio that will not even consistently beats the market, and that investors would be better off investing in passive, low-cost index funds instead.

What does this mean for Ange and her ilk? Does this mean their crusade to beat the market is futile and all for naught? We’ll, here’s a ray of sunshine for the steadfast believers among you, something you can hold on to for a little bit of hope: Fama and French are pioneers of market efficiency, and while I have yet to see the full text of their study, I’ll bet that it is founded heavily on this school of thought. There are strong arguments against the efficiency of the US stock market set forth by advocates of behavioral finance like Robert Shiller and Richard Thaler, and I’m pretty sure that the evidence against the efficiency of the Philippine stock market is significantly more damning. So if the Philippine stock market is far from efficient, then maybe there’s a way to consistently beat it.

So Ange and your ilk, let’s see you guys do it. Or at least try to. Before I burst your bubble in my next post where I show further evidence against consistently beating the market. :P